Standard and Poor's sees 'stimulatory effect' from lower home loan rates for Christchurch red zone

By Gareth Vaughan

International credit rating agency Standard & Poor's says the big New Zealand banks moves to slice about 2% from home loan rates offered to Christchurch red zone home owners could ultimately have a stimulatory effect, supporting the banks' credit profiles, alongside strong commodity prices, temporary economic boost from the Rugby World Cup and the eventual rebuilding of Christchurch.

In a report entitled Asia-Pacific's Major 40 Banks Sail Tall In Choppy Seas, For Now, S&P says that although weak credit demand could curtail earnings growth in the short-term, the major banks - ANZ, ASB, BNZ and Westpac - could have some opportunity to improve their net interest margins by continuing to convert fixed-rate borrowers to floating rates, and because of more favourable repricing for fixed-rate loans. (See related story Alan Bollard's unprecedented power).

After the Government last week offered to buy 5,100 houses in some of the Christchurch suburbs worst hit by earthquakes, the major banks were quick to follow with special home loan rates to the affected home owners. ANZ launched a 3.70% one-year mortgage rate, which is 2.04% below ANZ and sister bank the National Bank’s variable, or floating, mortgage rate.Meanwhile, BNZ is offering a 2% discount on floating mortgages and an extra 2% on deposits and Westpac a 3.65% floating rate. ASB is offering 2% off floating rate home loans, bridging finance and a 4% call account rate.

"A relaxation of interest rates following the Christchurch earthquakes should eventually have a stimulatory effect, and in combination with high commodity prices, the temporary economic boost expected at the time of the Rugby World Cup and the eventual rebuilding of the earthquake affected Canterbury region, are factors that could support the stand alone credit profile of New Zealand's major banks," Gavin Gunning, S&P's director of financial institution ratings, says.

S&P has AA long-term ratings on all four of ANZ, ASB, BNZ and Westpac with stable outlooks. However, changes to the methodology S&P uses to rate banks could potentially see its credit ratings on the New Zealand banks lowered.

Here's what S&P has to say on the four big Australian owned banks individually:

ANZ National Bank Ltd. (AA/Stable/A-1+)

As the largest of New Zealand's four major banks, ANZ National recorded a sound result for its fiscal half year ended March 31, 2011, mainly because of improved interest margins despite a subdued market appetite for credit, and lower credit costs. ANZ's provision for credit impairment of NZ$78 million was a substantial decrease compared with the second and first halves of 2010 (of NZ$122 million and NZ$314 million). The impacts of the Christchurch earthquakes are considered manageable at current rating levels, noting that ANZ National expects to absorb the impact from the Christchurch earthquakes within its existing collective provisioning balance of NZ$727 million. Funding continues to be a relative weakness. The potential for a mild improvement in domestic economic conditions and higher interest margins could offset a relatively weak demand for credit, leading to marginally better underlying profitability in the short-to-medium term.

Bank of New Zealand (AA/Stable/A-1+)

For its fiscal half year ended March 31, 2011, BNZ met expectations at the current rating level. Impaired assets were reasonably flat over the past six months and appear to be peaking, although some rigidity could be expected should a mild improvement in domestic economic conditions prove to be slower than we anticipate. The impacts of the September 2010 and February 2011 Christchurch earthquakes on BNZ are currently considered manageable at the current rating level. BNZ set aside additional reserves of NZ$60 million for earthquake losses in the first half, while funding continues to be a relative weakness affecting the rating. We anticipate that a modest improvement in pre-provisioning profitability could be achievable in the short-to-medium term, while capitalization is expected to remain at or about current levels.

ASB Bank Ltd. (AA/Stable/A-1+)

For its fiscal half year ended Dec. 31, 2010, ASB delivered good income growth against the backdrop of the New Zealand economy, which showed some signs of improvement in 2010 despite low credit growth. However, we expect that the impact of the Christchurch earthquake in February 2011 will retard the profitability that otherwise would have been achievable in the current half year. To date, ASB has not provided market guidance concerning earthquake losses, although our current view is that they should be manageable at the current rating levels. Home loan margins improved in the first half, benefiting from a shift in home loans from fixed to variable rate (a common happenstance across the New Zealand major bank sector) and re-pricing initiatives in response to higher funding costs. While impairment expenses decreased in the first half, we expect some rigidity in non-performing asset levels associated with earthquake losses and uncertainty concerning the economic outlook.

Westpac New Zealand Ltd. (AA/Stable/A-1+)

WNZL reported a sound result for its fiscal half year ended March 31, 2011. This was indicated by its net profit after tax of NZ$191 million, which was up by 12.4% and 64.6% compared to the two prior half years, respectively. Provisioning charges of NZ$125 million for the half year ended March 31, 2011, included an overlay for the Christchurch earthquakes, which was increased to NZ$53.5 million, in addition to NZ$12.6 million already provisioned for specific losses. The impacts of the September 2010 and February 2011 Christchurch earthquakes are considered manageable at the current rating level. Capital ratios improved in the first half, although we will assess the extent to which higher capital is permanent rather than temporary as WNZL eventually transitions to Basel III. Funding is a relative weakness affecting the rating, although our potential concerns are alleviated considering WNZL's access to parent funding, in the event of need.

Based on S&P's calculations, ASB has the best return on average assets at 0.87%, followed by ANZ at 0.85%, BNZ at 0.74%, and Westpac at 0.68%. The credit rating agency says ANZ leads the way in gross non-performing assets/customer loans and other real estate owned at 2.74%, Westpac next at 2.21%, BNZ 2.08% and ASB 1.41%.

S&P also has ASB's tier one capital ratio the highest at 11.1%, followed by Westpac at 10.3%, ANZ at 9.55% and BNZ at 8.49%. The Reserve Bank minimum is 4%. Tier one capital represents the shareholders' funds in the bank - ie their share of the bank's assets after all of the bank's debts have been repaid to creditors.

Meanwhile, BNZ has total loans to customer deposits of 172.4%, Westpac 165.8%, ASB 158.8%, and ANZ 141.5%, S&P says.

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